Sell Those Buildings, But At What Cost?

As soon as next month, 11 office buildings owned and occupied by the state of California will drop the 'owned' part of that description, after clearing a major hurdle this morning that critics continue to say is a budget deal that's penny wise and pound foolish.
The proposal, which was part of the 2009 solutions to the state's budget woes, hands over the buildings and land in 11 locations to private owners for a net profit to the state of almost $1.3 billion. Of course, that's a short-term profit; the state soon becomes the tenant to a private landlord, paying rent instead of paying down existing debt which would have ultimately been retired and left the buildings and real estate in the free and clear.

Today's hearing of the state Public Works Board follows a critical assessment of the deal (PDF) offered last week by the nonpartisan Legislative Analyst's Office. The LAO's bottom line: the deal will cost California taxpayers as much as $6 billion more over 35 years than owning the properties, in exchange for a one-time cash infusion to pay current operating expenses.

The details of the sale (PDF) have been crafted and managed by the state's Department of General Services (DGS), an agency under the direction of Governor Arnold Schwarzenegger. Which means it wasn't surprising this morning when the Public Works Board voted to begin dismantling the existing bond offerings that paid for the construction of many of the buildings. The Board voted 3-2 in favor of the sale/leaseback, with the three 'yes' votes -- DGS, the state Department of Finance, and CalTrans -- all coming from the Schwarzenegger administration.

The two dissenting votes were from surrogates for Treasurer Bill Lockyer and Controller John Chiang. In an emailed statement to reporters this morning (PDF), Lockyer slammed the sale/leaseback proposal:

I fully understand the difficult circumstances, and the desire to protect vital public services, that led the Governor and Legislature to authorize this sale of valuable public property. But I believe the deal is poor fiscal policy and bad for taxpayers... Further, I am not convinced alternatives to the sale, such as refinancing of the debt, were ever seriously considered. Nor am I convinced it was necessary or desirable to require bids that assumed the state would no longer operate these buildings, which it could do without terminating employment for thousands of state workers who have cared for our properties efficiently and effectively.

Also discussed at length, both by the LAO and during this morning's hearing, was whether the deal should have been structured so that only the buildings were sold, leaving the land under the ownership of the state. In such a transaction, all structures would revert back to state ownership at the end of the lease.

That kind of arrangement, submitted as a bid by a public joint powers authority, was rejected by DGS. While such a proposal could have made the deal less costly in the long run for the state, it's also true that the process could have taken longer -- and backers of this so-called "public option" asked the Board today to postpone a final decision. It also appears that the winning bid of $2.33 billion from a CA/TX/NY consortium was the highest received. And in a deal like this, the biggest short-term bang was no doubt the focus.

In fact, the only real action at this morning's hearing came when the representative of DGS on the Public Works Board essentially accused the 'public option' supporters who testified of being mostly motivated by sour grapes for having lost out in the bidding.

Regardless, it appears these buildings -- some named for iconic California leaders (the Ronald Reagan State Building in Los Angeles, the Governor Edmund G. "Pat" Brown Building in San Francisco) -- will soon be in private hands. The transition may also mean some uncertain futures for state workers who provide support services to those facilities.

And, while providing an infusion of cash that's already been counted on (i.e., it was on the books before the new $25.4 billion deficit mess), the deal's real effects may not be known for years to come.

About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk. He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.